Chains make holiday plans, but will they get their wish?

Drug Store News, Sept 23, 2002 by John Stone

As drug chain executives returned from the Labor Day weekend and began to frame their sales forecasts and promotional plans for the upcoming holiday selling season, they faced sharply conflicting economic reports.

In the first week of a new school year in many states there were several positive signals. U.S. auto sales rose 18 percent in August as consumers responded strongly to sales incentives. The Labor Department reported year-on-year average incomes up 1.9 percent after inflation. And the nation's unemployment rate dropped to 5.7 percent in August from 5.9 in July.

On the negative side, the Labor Department also said second-quarter productivity only rose 1.5 percent, compared with 8.6 percent in this year's first quarter and August back-to-school sales at mass merchandisers slumped badly, with Wal-Mart showing a small 3.8 percent gain in same-store sales and Target reporting a 0.1 percent decline. And a report on the retail industry from the financial ratings service Fitch Ratings, dated Aug. 30, said a meaningful recovery will not take place until 2003. Fitch cited "signs that consumers are becoming more cautious, with consumer confidence down to 93.5 in August from 106.3 in June, according to the Conference Board."

Frank Badillo, vice president and chief economist of the forecasting firm Retail Forward, said drug chain retailers still have reason for holiday optimism. He said baby boomer consumers have shown resilience in their buying confidence and conveniently located community stores have a chance to win purchases that are not currently going to shopping malls.

"In some aspects, the drug store business tends to be counter-cyclical," Badillo said. "Consumers are avoiding the big spending trips to the malls and supermarkets. You see it in the fall-off in spending at mall apparel stores. People have shifted to convenience stores. There is potential sales gain for the well-stocked community store."

Badillo predicted the pressure on price in the front end will not be as severe this holiday season with inventories down. He said holiday season sales growth was about 4.2 percent last year, which he attributed to a "bounce back from 9-11." The Retail Forward economist, however, sees slightly weaker growth this season to about 3.5 percent. He noted retailers will face more competition this season from catalog sales, which dried up last season as consumers backed off mail orders in the wake of the anthrax scares.

Holding the line on inventory

In this volatile early September atmosphere, drug chain executives focused on critical consumer attitudes in their own operating neighborhoods and remained cautiously optimistic. A stated strategy among several was for slightly, but not dramatically, tighter seasonal inventories and more aggressive advertising schedules, especially in the addition of store circular pages. Central to some plans is a need to communicate with customers earlier, as the traditional Thanksgiving start to the holiday shopping season is on Nov. 28, six days later than last year's Nov. 22 turkey day.

"We have been more conservative. We don't buy as deep for the holidays as we used to," said Gerald Heller, president and chief executive officer of Tulsa, Okla.-based May's Drug Stores. "We are buying tighter for a better sell-through and looking for quality selling, not quantity."

Heller said trim-a-tree merchandise is a major part of the Christmas selling season for May's, and the chain is looking for sales with new light sets and decorative lawn displays where "we have slipped into higher price points."

Circulars are May's biggest holiday advertising expenditure and, on weekends starting from early November, the chain will go up to 12 pages from its usual eight in several distributions. The seasonal increase in ad expenditure will be about 10 percent. Heller was encouraged by sales of some early season merchandise, including a $50 rocking horse that was selling quickly. But he was concerned about job losses to "well over 1,000" Oklahoma workers as a result of mergers at Phillips Petroleum and Conoco, the demise of Williams Communications in Tulsa and staff downsizing at local offices of WorldCom and TV Guide.

Mark Griffin, president and chief executive officer of Sioux Falls, S.D.-based Lewis Drug and chairman of the National Association of Chain Drug Stores, said he anticipates patriotic consumer sentiment and home enhancement will continue this season, as it did following the terrorist attacks.

"I think Santa's sleigh will have a red, white and blue flag on it," Griffin said. "The circumstances create an unusual forecast because people are still tender about 9-11 and the economy. Typically, people stay closer to home and nest. We look forward to a practical holiday season, and I think there is a conservative inventory philosophy out there now because of the uncertainty."

The NACDS chairman said he expects to see "buyers responding to promotions through a large part of the selling season. There will be more pages in circulars." Merchandise he expects to see moving includes small gifts, some fashion items, some soft goods, home decorative accessories and "a wider variety of front-end merchandise, period." Griffin said he sees economic conditions to be "uniformly soft" around the country this year, with little regional variation.